Some of the ways you can invest for a child involve tying up the money until they are 18. So they won’t be suitable, say, for school fees planning or if you might need the money in an emergency.
Depending on how you invest, you may be required to hand over the investments to your children, at which point they can spend the money as they choose. If you want more control (e.g. to delay when they can access the money, and/or for what purposes etc.), then you may be better off with a ‘designated account’ or a more formal trust drawn up by a solicitor.
You should speak to an independent financial adviser
Generally, the longer the period you are investing over, the more risk you can take on, as your investments have time to recover from any setbacks in the short term. Investment companies are primarily intended as long-term investments. You should be prepared to hold them for at least 5 years, and preferably 10 or more.
If you are likely to need the money in the near future, or cannot afford to lose the money, you should not invest in investment companies.
If you are making your first investments for a child, you will probably want to start with a generalist investment company which invests in a wide range of different sectors. Some of the oldest and most popular investment companies can provide easy access to the stock market, and are often very cost effective.
If you invest in investment companies via a ‘designated account’, then the shares remain yours and you will be taxed on the income and capital gains in the normal way.
If you put investment company shares into a ‘bare trust’, then they are held for the benefit of your children, who have their own income and capital gains tax annual allowances to reduce any tax liability.
However, if you make investments on behalf of a child which generate an income of £100 (gross) or more a year, the income will be deemed to be yours and you may have to pay income tax on it. This does not apply to contributions to a Junior ISA or Child Trust Fund, nor if the money was given by a grandparent, friend or other relation of the child.
If you decide to make a gift to your children you should make sure you understand the Inheritance Tax implications. To learn more on this, and other tax issues, you can either visit HM Revenue and Customs’ website (www.hmrc.gov.uk) or speak to a financial adviser.
Investing for your children can be complicated. You should consider taking independent financial and legal advice if you are not sure about how to invest, what type of investments might be suitable and the tax consequences.
You can invest in a number of different ways, including saving schemes, Junior ISAs and even a pension
The right balance of investment companies can help you build a balanced portfolio for better long-term returns
Visit the AIC website for news, statistics and comment on investment companies.
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This document is for information only and does not constitute investment advice or a personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment mentioned here. The Association of Investment Companies has taken all reasonable steps to verify the information contained in this document, but does not accept responsibility for any errors or omissions or for losses of any nature incurred by any person acting or refraining from action in reliance on such information. This document may not be printed, reproduced or further distributed to any other person or published, in whole or in part, for any purpose.
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